Investment Cycles, Strategic Delay, and Self-Reversing Cascades∗

We study investment cycles and information flows in a model of social learning in which investment returns fluctuate according to a Markov process. In our Waiting Game, agents observe the investment history and a private signal correlated with the current period’s investment return. Agents then decide whether to invest in round 1 or to delay their decision to round 2 of the current period. Cascades in which everyone invests and no one invests eventually correct themselves. As compared to the No-Waiting Game with no opportunity for delay, the Waiting Game has shorter investment cascades, longer recessions, and shorter booms. The Waiting Game also has more underinvestment and less overinvestment.